The latest reading on leading indicators came in at +1% – the best reading since 2005.
With the S&P 500 as one of the 10 components of the index and a 40% move in stocks the stock market actually contributed 50% of the improvement in leading indicators. David Rosenberg refers to this as “double counting”. Regular readers know I am not a big proponent of the stock market’s ability to forecast anything. Markets in general are notoriously irrational for simple reasons – the summation of the thoughts of its users are generally irrational because human emotion is irrational. Many market participants believe the stock market forecasts out a year or longer, but as I’ve argued before, I don’t believe the stock is a good forecaster of anything further out than one quarter ahead.
So you have to wonder now, assuming the stock market isn’t in fact a great leading indicator, how useful is the leading indicators statistic as a barometer of future growth when 50% of a particular reading can be based on past performance of a lone stock index? I’d say not very useful….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.